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Long-time bond bull Robert Kessler takes a victory lap and says there's plenty of room for...
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Saturday, June 2, 2012, 11:45 AM ETLong-time bond bull Robert Kessler takes a victory lap and says there's plenty of room for yields to fall further. That's bad news for stocks, he says, as low yields are forecasting lower profits. How to make money with these yields? Banks can conservatively lever 20-to-1, borrowing for nothing to make 15% returns. It's a casino, but the House (the Fed) is paying everybody to play and win.
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There is no better business on Earth than borrowing at 0% and lending at 5% with 15x to 25x leverage.
NICE!!
How come then that Moody's downgraded nearly all German and Danish banks just two days ago?
The market psychology is SELL EVERYTHING!!!
Once the "risk off" market starts puttering out (at the end of the European debt crisis) then banks (which will be trading at half of current levels) will be the ultimate investment.
In short, a great company isn't a great buy until people stop dumping its shares.
The only hope for the pension funds is for a massive sell-off in equities and risk assets, aka 08/09, so that real LT investors can reallocate part of their portfolios to equities and risk assets at much much lower than current levels.
The Fed is pushing investors into riskier assets, but they also have a motive to keep Treasurys "low and stable" and as attractive collateral for funding markets. What they cannot indefinitely control is that Treasurys gain "latent" interest rate risk as the hedges are applied to suppress their yields from rising sharply. As I also point out, these debt instruments are increasingly woven into the financial fabric.
Junior economists, there is a good reason interest rates are low. Drag out your Econ 101 textbook and read some. Unless you think economics is a liberal conspiracy, if that is the case there is no hope for you.
Obama thinks that no profits are ethical for healthcare related businesses. He will crush all their margins if he gets the chance- especially if the government becomes the main buyer of their goods and services.
That's why pharma shares have done so poorly over the past few years.
President Romney, January 2013
But Whitehawk is spot on...JNJ may be a good yield but does not carry the same weight as the U.S. Treasury and is a riskier investment.
I think the point Whitehawk is making is that over time, most generations when they retired utilized their savings to invest in government bonds (considered to be the most secure investment) that yielded 4-6% to supplement their retirement plan income stream (IRA, 401K or Social Security).
Now, with the FED driven yields on government bonds and T bills at 1.5% or less (you are actually paying the government to use your money if you consider the effects of inflation) retirees can't sustain a decent standard of living.
Certainly, some will invest in stocks such as JNJ, PG or MSFT. However, many do not have the knowledge, investment acumen or financial resources to do so and in any event while yielding better returns they are not as secure as government guaranteed debt and thus are more risky investments.
If you want proof...look at the price performance of those great yielding equities last week and see how they and the DowJones, S&P 500, etc. performed.
Consequently, those on fixed incomes got hosed by the government that drove them into those riskier investments.
This is all by design on the part of the FED and our illustrious government leaders and is a situation that is not likely to get better for several years as the government cannot afford to let interest rates on debt move higher (which free markets would mandate as risk gets higher). The truth is we can't pay the higher interest. If Interest rates were to move from 1.5% (where they are today on the 10 year Treasury) to 5-6% (where they are now moving in Europe and where they will move in the US eventually) the amount of money needed to just pay the interest on the ballooning national debt (forget about ever paying the debt down) would equal more than 100% of all the taxes collected annually by the US Government...would allow no money to pay for other government activity such as highways, schools, armed forces, social security, medicare etc.
I believe this explains to some degree why our government is hell bent on this national health care law (it allows them to contol 1/6 of the national GDP associated with healthcare). It also explains why they are now in the process of trying to draft some form of legislation that will allow them to confiscate and manage all private pension funds, IRA's and 401K's...they need to have control over those dollars and expenses to help meet the coming financial disasters they have promulgated through their prior actions.
Bottom Line...Fixed Income Americans are being forced into riskier and riskier investments (chasing higher yields) while simultaneously being crushed by market reactions to the actions of US and other governments. Our President and Legislators will then reason that the average American is not sophisticated enough to manage his or her own retirement savings as justification for confiscation of what resources Americans have left. And yes I do believe it is planned as a way to move the US into a situation where the majority of our citizens are dependent upon the Federal Government for our daily sustenance.
Paul Nichols
The current model of using the emergency room as the health care of last resort is plain wasteful.
1. Lack of innovation and patent expiration;
2. Extreme over valuation in year 2000.
Despite that, big pharma easily sported profit margins of 20% or more, way higher than the hated Exxon Mobil. Since our nation is being crushed by healthcare costs and uninsured middle class is being bled dry, shouldn't big pharma be forced to cut back some of their greed and return 10% of their margin to the society?
As Mr. Greenspan suggested on CNBC the other day, if the central banks just keep expanding their balance sheets ad infinitum by printing money, we can do away with taxes altogether. (it's not clear if he was jesting). With the Fed buying about one half of each new issue of treasuries, and the one percent paying little or no tax, this would appear to be the way things are heading. Gee, I wonder how this will turn out?
There is very little left here. It is not for me to say how much longer real yields will be negative; with the degree of manipulation and the depth of the disconnect between the banking world and the real world, it could be an hour or a decade. What is for me to say is that the risk/reward tradeoff in these securities is as unfavourable as that in any asset has ever been. So there are two ways of looking at it: either bond yields are no longer meaningful to real-world investors (in which case we should ignore them as they're no longer part of our asset universe) or bond yields reflect extreme market insanity and we should stay as far away from them as possible. Whether some bank may manage to eke out a 10% gain somewhere by risking its entire existence on the continuation of crony capitalism is irrelevant to any decision we may face. The choice is as obvious as any investment decision in human history: real-world investors must not own bonds. If you have any, sell them now.
disagree with you respectfully on the bonds, there's a lot of upside in TLT and ZROZ for a good while as the equity markets revisit 08/09 lows and then some....
tell me, friend, who will do all the forced selling this time around? The only reason we fell so deep in 2008 and 2009 was through forced liquidations, for example of CDOs and SIVs that were delevering. And the panic of the relentless selloff in credit then spread to equities, as the entire world's banking system was on the brink.
Now the leverage in the system has been greatly reduced and after 4 years of constantly scary headlines most people have already given up. So who will do the forced selling this time? All companies are sitting on hoards and hoards of cash. Why would they sell off 40 % from here?
Then again, don't bother answering. Keep holding on to that dream of yours. You missed the bottom last time but doggone it, you won't miss it this time, right?
Stocks are richly valued based on normalized earnings and tepid growth prospects although somewhat less so than at the 2007 peak. Per Gary Shilling, with a recession, you get S&P earnings going to maybe 80, and put a reasonable bear market multiple of 10 on that, and you get 800 at the bottom. 800-900 would also be in line with history--a recession on average involves a 40% peak-to-trough decline. The last two were worse, but the last two also started from frothier valuations.
Your balance sheet observation is worthwhile as it suggests we won't go as low as 2009 when everyone feared insolvency risk even among high-quality cyclicals.
BTW, I didn't miss the bottom last time--was aggressively invested with options-based leverage.
I'm up for the year, same as the last 5. I'll even be more specific since you only seem to be able to handle broad characterizations. I've got a target of 865 on the S&P. I'll swing back around to you when it hits but in the meantime you keep up the uninformed, wise ass posts.
since you do not provide any stats whatsoever to support your viewpoint that leverage now is NOT lower than it was 4 years ago I guess we just have to take your word for it.
I mean, a guy like you who was profitable for 5 years (!) in a row cannot possibly be wrong about anything ever. That would be against the laws of the universe.
Your target of 865 will surely be reached. It must be so, or you would not have said it.
I also like to look at the opinions of other thoughtful investors, but I took a look at your blog anyway, last post in 2009? You must have been busy. You have real chutzpah ripe old age of about, what 35, with, maybe 10-12 years of trading experience? It would appear that you've experienced, one, maybe two, entire downturns in the market. TWO! I could easily envision you having had similarly informed posts about never reaching the 2001/2 lows either again either right? Having watched those two downturns wipe out a lot of investor friends capital and jobs, it is very much the filter through which I view markets and I'd much prefer to sell a little early on the up move than be long when the downturn comes and wherever possible buy as cheaply as possible. Risk and position management, things like that.
I see young guys like you all the time late 20s early 30s, who start to believe in their infallibility of a little success. Usually, they implode, at least once, and that tends to properly humble them, so I'll wait and watch.
not sure why you think getting personal gives you more credibility. I think 13 years of experience is nothing to laugh at, but ultimately it depends on whether you are profitable or not. That may be after 2 years, or 5 years, or never.
If you're profitable, more power to you. I personally try to forecast as little as possible, but if your forecasting works out for you, then that's a good thing. I'll most likely resurrect my blog shortly. I'm not interested in having a fight here online - that's a total waste of time for everyone involved. Good luck in the future with your investments.
Once 30-year mortgages hit 3%, rental real estate in selective markets (college towns) should also be a good play.
Are you just a troll, or what?
They, too, laughed at the idea of yields that are welded to the floor for dozens of quarters.
"Impossible!" they said (in Japanese, of course).
So...what do JGBs yield now vs. 1997?
...and why can't that happen in North America and Northern and Western Europe again?
I like the example of Japan as it shows how dumb dumb-money is. My point: instead of staying in JGBs with paltry yields, Japanese investors should have invested in the Nasdaq from 1990 to 2000 and then have switched to commodities from 2000 to 2008. They would have made 100x their money.
Why didn't they just do this? So easy. People are so dumb.
LOL
I love these SeekingAlpha replies. They're EXACTLY the same arguments made for tech stocks in 1999 and housing in 2006!!
To support please....
If the world is sunny and everyone is going to be making money hand over fist I should get at least 7% on bond, because I could get that easily in stocks.
If investors jump at the chance to get 1% in 'safe' bonds, they are saying they like the safety feature more than the risk in stocks and real estate.
I don't see any logical connection here.
But see what happens to stocks when the US Dollar has no Euro as competition -- stocks collapse. Stocks have become anti-Dollar plays; when the Dollar sinks, stocks, commodities, housing prices (?) rise or are stabilized. Ben's plan all along was to sink the Dollar and reinflated the DEBT BUBBLE. But he's been checkmated.
Now we get to follow Japan's trail into the Black Forest.
As to the issue of "deflation", ok deflation is possible, for maybe one or two quarters. Over the 10 year maturity of a 10-yr T-bond or the 30 year maturity of a 30-yr T-bond, deflation is highly unlikely. An investor who holds the longer term "safe haven" bonds to maturity would be eaten alive by inflation coupled with a subpar yield.
It will be interesting to see how this all develops.Like all bubbles, the ending will not be pretty.
She is STILL laughing all the way to the bank.
The same will happen here. Mark my words.
Today's 20-year US Treasury bond yields 2.13%. If you suppose that its yield will decline to match Japan's current level of 1.63% in the next few months, you will walk away with a nominal profit of about 7%. If you hold it to maturity, as our hypothetical Japanese investor did, do you really believe you'll be getting much purchasing power from your principal? The best you can hope for is a Japan-like slow decline in the dollar's value. The US government debt to GDP ratio today stands at 103%, a level that suggests extreme danger especially given its rapid growth.
It's very obvious that there is no comparison between buying a 20-year JGB in 1991 and buying a 20-year US Treasury today. The risks are much greater and the potential returns much lower regardless of whether one intends to trade or hold to maturity. If the United States owed 35% less money and had a balanced budget, and the market offered me a 7% yield, I might think about it. Even so, I probably wouldn't buy it; while yesterday's Japanese investor benefited from the relatively slow decline in the value of the yen, I do not believe the future looks that rosy for the US dollar. Even if I did, however, the current yield offers no meaningful opportunity to profit and plenty of ways to lose big. You may choose to laugh all the way to the bank, but the joke's likely to be on you. Even if you're right and interest rates remain historically low for 20 years and you're paid as promised, you'll still make a very small nominal profit and lose quite a lot of purchasing power. That's pretty much the best-case outcome for you, so I don't even need to consider the other possibilities to know it's a bad investment.
2. I was comparing the JGB with the performance of the Nikkei not U.S. Treasuries.
3. Perhaps another decade of extremely low yields will be great for equities but I doubt it. Baby boomers want yield not equity risk.
4. Ben Bernanke has proven that he would eat a man's face before he would allow the target inflation peg to increase.
5. I see no reason why China, Japan, Europe and the Arab oil powers will stop buying U.S. Bonds in the foreseeable future.
Bond, US Bond
007